Classic Rescue Act

The Reserve Bank of India (RBI) stood up to its word of limiting volatility in the foreign exchange market with its latest package. Despite any fundamental reasons to justify a further weakening of the rupee, speculators had started playing on fears that the rupee would depreciate. By buying in the morning and selling later in the day, they made a fast buck. In a sort of self fulfilling prophecy, the rupee went on a downward spiral. The low of Rs 43.65 that it touched on Wednesday sufficed to galvanise the regulator into action.

The strategy that the RBI has adopted is classical: castle the currency and make it more expensive for the players who are out to make rupee-profits on a depreciating rupee. The forex and the money markets have been temporarily disengaged and the spot and forward markets segregated.

The net result of the Rs 5,000 crore liquidity absorption and the 300 basis point repo rate hike is that banks will shift to the repos market. As a result, arbitrage between the money and forex markets will come down and banks will be forced to unwind positions. The net effect will be to slow the onslaught on the rupee as the cost of buying dollars shoots up.

Analysts say that this will also ensure that when the Resurgent India Bonds (RIB) mop-up enter the system, it does not cause a liquidity overhang which could have led to a further pressure on the rupee.

Asking dealers to report their opening positions and peak intra-day positions seeks to control profiteering by banks. Spreads between buy and sell quotes had widened considerably, indicating volatility. Banning importers from cancelling and re-booking contracts, a facility being used to make treasury profits from rupee depreciation, will also curb speculation.

Another trend that will be arrested is the misuse of the facility given to corporates to first book forward and subsequently lock in to the spot rate as corporates were found buying and selling in the spot market without booking the forward contract.

Banks will have time to adjust to the new measures because unlike the previous time, the measures are not with immediate effect. Analysts expect short-term deposit rates to firm up. On the lending side, CP rates have gone up but PLRs are unlikely to see any hikes. The flexibility of utilising the RIB proceeds, too, will ensure that adequate liquidity is available in the banking system if required.

It can be argued that these measures will tighten the liquidity conditions and thereby impair chances of a recovery. While easy money has not been able to generate a recovery so far, the fact is that tightening of money supply will not have any major impact on corporate borrowings as it comes at a time when liquidity in the banking system is quite high. Moreover, credit offtake has been sluggish. Non-food credit has declined by 2.1 per cent between April 1 to July 31 while growth in investments in bonds, debentures and CPs too has slowed down in the period.

Corporates are thus unlikely to feel the squeeze because apart from the fact that these measures are temporary, banks are unlikely to see their cost of funds increase to an extent that warrants a rate increase, say analysts. At the longer end of maturity, these measures are unlikely to have an impact on either deposit or lending rates.

Standard Industries

Selling assets has not got Standard Industries anywhere but it has still not given up trying. In the year ended September, 1997, it had sold off its Dewas spinning and weaving mill that had 38,564 spindles and 64 automatic looms to S Kumar's for Rs 17.4 crore. That transaction enabled it to show a net profit in that year. Against sales of Rs 364.62 crore, its total expenses amounted to Rs 373.97 crore. If not for an other income component of Rs 51.17 crore, losses were almost certain instead of the Rs 3.05 crore profit it finally declared for the last fiscal.

The proceeds of this sale were to be utilised to rationalise and restructure its other textile units in Mumbai and Gujarat. A glance at its six month performance in the period ended March, 1998 reveals that little has changed over the previous year. Sales stood at Rs 166.33 crore while its expenses stood at Rs 170.74 crore. The operating loss was compensated for by other income of Rs 24.3 crore which, after meeting interest, depreciation and tax resulted, in a net profit of Rs 3.12 crore.

Now, one more spinning and weaving unit at Surat with a capacity of 29.280 spindles and 56 automatic looms is being hived off, and is being transferred to a subsidiary company for a consideration of Rs 31 crore. While this will prop up the other income for the year ended September, 1998, it remains to be seen if the restructuring benefits its operational efficiency in any manner. Until then, the share price, which is quoting at less than half its par value, is unlikely to improve.